Are Your Construction Contracts COVID-proof?
It’s the fourth quarter of 2020, and the COVID-19 pandemic continues to affect the construction industry. Project delays, work stoppages, supply chain disruption and lost productivity remains a reality for many contractors. All of this makes planning difficult, particularly when drafting construction contracts. To protect your business from liability in these uncertain times, be sure to include the following clauses in project contracts.
Force Majeure for Infectious Disease
A force majeure clause is a contract provision that excuses nonperformance or extends timelines when a natural or unavoidable catastrophe beyond the contractor’s control (an “act of God”) delays a project. Whenever possible, include a force majeure clause in contracts that specifically names COVID-19 and other keywords such as “infectious disease outbreak,” “quarantine,” “epidemic” and “pandemic.”
It’s important to note that some legal experts worry that a COVID-19-related claim, on its own, won’t satisfy the standard force majeure test of unforeseeability. For this reason, the force majeure definition in your contracts should be amended to include situations where a COVID-19 outbreak’s impact on your workforce and supply chains reaches a threshold that’s considered “unforeseeable.”
Also, keep in mind that two of the most widely used contract forms — the American Institute of Architects (AIA) A201-2017 and ConsensusDocs 200 — don’t contain force majeure clauses. Instead, they have delay clauses listing occurrences in which a contractor may be entitled to a time extension. The ConsensusDocs 200 agreement does list epidemics as a justifiable delay.
Price Acceleration in Your Construction Contracts
Now more than ever, you need to anticipate how supply chain disruption can result in bottlenecked pipelines and unpredictable price hikes. Contracts should include a price acceleration provision that enables you to adjust the contract price to reflect actual costs if market prices increase over the course of the project.
When bidding and negotiating a contract, include a backup plan of two or more alternative supply sources and information on acceptable replacement items. Because pandemic-related border restrictions could impact supply chains, also determine alternative shipping and delivery routes (as well as any associated additional expenses) and specify which party would be responsible for absorbing those costs. Consider asking for a deposit to buy and store materials before the project begins.
In some circumstances, a change-in-law provision can be more useful than a force majeure clause. But be sure to define “law” to include not just local, state and federal laws and regulations, but also acts of government officials such as stay-at-home orders. It’s also a good idea to add governmental recommendations and guidance under the definition.
Health, Safety and Environmental Obligations
Costs are likely to rise as more pandemic-related requirements — including social distancing of work crews, temperature checks, additional personal protective equipment and installation of sanitizing stations — are included in project contracts.
When calculating costs, make sure you’re doing everything to comply with the Centers for Disease Control guidelines and those of other agencies, such as your state’s or county’s health department. They may require you to have onsite safety officers and follow other protocols. Your contract should specify who pays for pandemic-related safety equipment or, if both parties are partly responsible, how the costs are to be allocated.
Assurances of Financing
Depending on how hard their city or region has been hit by COVID-19 shutdowns, project owners and developers may have difficulty qualifying for financing. Most form contracts require owners to provide documentation proving they have enough funds to complete the project. Most contracts also include a provision allowing contractors to request financing documentation. Be sure to exercise this right if you suspect a project owner’s financing is in jeopardy.
In addition to fortifying your contracts, ensure that you and your subcontractors, suppliers, and consultants are covered for possible COVID-19-related lawsuits and claims. Carefully review current insurance policies (including business interruption coverage), bonds, guarantees and security agreements to confirm liability coverage related to outbreaks and infectious disease.
The COVID-19 pandemic is expected to have a long-term impact on most businesses, including construction companies. Therefore, you need to continually anticipate how the ongoing crisis will affect the language of your contractual arrangements. Engage a qualified attorney to review your contracts or create new ones.
Kirsch CPA Group works with contractors to assess the cost impact of any changes. Learn more about how we work with the construction industry. Contact Kirsch CPA Group at 513.858.6040 or schedule a 15-minute exploratory call.